When Underfunded Pension Funds Take Up Social Responsibility Investing

A fascinating blog post by Bernard Sharfman takes a skeptical look at the activist investing of public pension funds, especially in the context of proxy access.

Sharfman, a prominent corporate-governance theorist with the George Mason University School of Business, takes a laissez-faire view of the field of corporate governance considered as a whole. We’ll get back to that Big Picture point, but for now let us look at the detail work.

Sharfman, in this posting for the R Street blog, is clearly unhappy that the Securities and Exchange Commission has taken to allowing and even encouraging fights over proxy access rules. He charges that pension fund managers in general – and New York City’s Comptroller in particular – have taken to this as a kid might take to a new toy, and that they are engaging in these fights in ways that don’t assist in the goal of value maximization.

If it Ain’t Broke….

The “Exhibit A” of this critique, then, is that Comptroller, Scott Stringer, ex officio advisor to New York City’s pension funds. Sharfman observes that Stringer submitted 75 proxy-access proposals to publicly traded companies, that 63 of these (70%) went to a vote, and that 41 of those (65%) received majority support.

Sharfman says, further that though the votes on NYC proposals may be a success from Stringer’s own point of view, his responsibility is to maximize the wealth available to present and future retirees in the system, and it is “very much in doubt” whether beneficiaries have benefited or are ever going to benefit from the Boardroom Accountability Project.

Sharfman posits that the Stringer campaign would have made sense from the perspective of wealth maximization if and only if the firms targeted by the Comptroller exhibited a statistically significant underperformance relative to others that he passed by. In this case, he might reasonably have concluded that corporate governance within those entities was broken, from the point of view of investor return, and that this act on the part of his office was necessary to fix it.

Then Sharfman cites a study by Tara Bhandari et al. that found that the Stringer proposals were not targeted at companies notable either for poor performance or for weak corporate governance.

New York City’s pension funds are underfunded by $46.6 billion, so it seems especially irresponsible for Stringer to take as his own any standard other than maximizing that wealth in order to shorten that gap. Sharfman charges that politics are at play here, and that in such a heavily Democratic city “it’s helpful for a politician to establish a populist track record on such issues as climate change, board diversity and executive pay before the next or subsequent elections.”

Bhandari’s View

There is an apparent oddity in Sharfman’s reliance on the Bhandari paper to make this point: Bhandari and his colleagues clearly believe in a “universal mandate” for proxy access – their point is that proxy access shouldn’t have to be won case by case, corporation by corporation, at all. An order should come down from the SEC resolving the issue once and for all.

That is very far from Sharfman’s own view. His view seems to be that in most cases stockholders are right to rely on the board of directors’ own nominating committee, which has an informational advantage over even the best informed shareholders. Looked at from the bottom line, his take is that in most situations, for most corporations, both the public authorities and activism-inclined institutional shareholders would be well advised to butt out of the preparation of proxy materials.

So there is an oddity, but no material for rebuttal here. The fact that A proposes X for one set of reasons and B agrees with X for an entirely different set of reasons doesn’t establish that X is wrong.

A Final Thought

Cydney Posner, writing in a blog sponsored by Cooley LLP, said recently that the SEC staff is working on new developments in the matter of proxy access, specifically on Rule 14a-8(i)(9), the rule that lets a management exclude a proposal from its proxy statement if it conflicts with a management proposal on the same subject. Posner said it isn’t clear whether new action will take the form of a clarification in a staff legal bulletin or new rulemaking.

3 Comments

I find the Bhandari paper to provide some interesting information, e.g., “the firms targeted by the NYC Comptroller did not exhibit statistically significant stock market underperformance relative to the control group.” However, I strongly disagree with how the authors interpret the results of their statistical analysis. I plan on writing about my disagreements in the near future.

“There is an apparent oddity in Sharfman’s reliance on the Bhandari paper to make this point: Bhandari and his colleagues clearly believe in a “universal mandate” for proxy access – their point is that proxy access shouldn’t have to be won case by case, corporation by corporation, at all. An order should come down from the SEC resolving the issue once and for all.” There is an ‘oddity’ here, yes — but there is no apparent agreement as you seem to imply.

The true oddity is that Sharfman takes a quote out of context to make it appear that the authors believe there is something bad about proxy access. In contrast, Bhandari found an average 0.5% increase in value for companies where proxy access was introduced. Bhandari and co-authors believe proxy access is so good that it should be universally required.

You say “The fact that A proposes X for one set of reasons and B agrees with X for an entirely different set of reasons doesn’t establish that X is wrong.” However, the conclusions of Sharfman and Bhandari are diametrically opposed. Bhandari supports his opinion with statistics; Sharfman supports his with the contention that, since directors have insider information, any candidates chosen by a board of directors has to be more qualified than any candidates chosen by shareowners. Do you really buy into that argument?